The Conference Board® U.S. Business Cycle IndicatorsSM U.S. LEADING ECONOMIC INDICATORS AND RELATED COMPOSITE INDEXES FOR DECEMBER 2004

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This month’s release incorporates annual benchmark revisions to the composite indexes which bring them up-to-date with revisions in the source data. These revisions do not change the cyclical properties of the indexes. The indexes are updated every month, but only for the previous six months. Data revisions that fall outside of the moving six-month window are not incorporated until the January release of each year when an annual benchmark revision is made and the indexes are recomputed.
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The Press Release in a PDF file

The Conference Board announced today that the U.S. leading index increased 0.2 percent, the coincident index increased 0.3 percent and the lagging index remained unchanged in December.

  • The leading index increased again in December and November’s increase was revised up slightly. These consecutive increases follow five consecutive declines, and the weakness in the leading indicators has become somewhat less widespread. It is now more likely that the five-month decline in the leading index was only a pause in the rising trend that has been underway since March 2003.
  • The coincident index, an index of current economic activity, increased again in December, and the strength in the coincident index continues to be widespread. At the same time, real GDP growth in the third quarter was revised up slightly to a 4.0 percent annual rate, a pickup from 3.3 percent growth in the second quarter.
  • The growth rate of the leading index slowed below its long-term trend (a 1.5 percent annual rate) in the second half of 2004, but not to a rate that has historically been associated with a recession. The behavior of the leading index since the middle of 2004 is consistent with the economy continuing to expand in the near term, but more slowly than its long-term trend rate.

LEADING INDICATORS. Four of the ten indicators that make up the leading index increased in December. The positive contributors – beginning with the largest positive contributor – were index of consumer expectations, stock prices, real money supply*, and average weekly initial claims for unemployment insurance (inverted). The negative contributors – beginning with the largest negative contributor – were vendor performance, interest rate spread, manufacturers’ new orders for nondefense capital goods*, building permits, and manufacturers’ new orders for consumer goods and materials*. The average weekly manufacturing hours held steady in December.

The leading index now stands at 115.4 (1996=100). Based on revised data, this index increased 0.3 percent in November and decreased 0.3 percent in October. During the six-month span through December, the leading index decreased 0.9 percent, with six out of ten components advancing (diffusion index, six-month span equals sixty percent).

The next release is scheduled for February 17, Thursday at 10 A.M. ET.

COINCIDENT INDICATORS. All four indicators that make up the coincident index increased in December. The positive contributors to the index – beginning with the largest positive contributor – were industrial production, employees on nonagricultural payrolls, personal income less transfer payments*, and manufacturing and trade sales*.

The coincident index now stands at 118.6 (1996=100). This index increased 0.2 percent in November and increased 0.3 percent in October. During the six-month period through December, the coincident index increased 1.2 percent.

LAGGING INDICATORS. The lagging index stands at 98.9 (1996=100) in December, with three of the seven components advancing. The positive contributors to the index – beginning with the largest positive contributor – were average duration of unemployment (inverted), average prime rate charged by banks, and ratio of manufacturing and trade inventories to sales*. The negative contributors were commercial and industrial loans outstanding*, change in CPI for services, change in labor cost per unit of output*, and ratio of consumer installment credit to personal income*. Based on revised data, the lagging index decreased 0.3 percent in November and increased 0.1 percent in October.

DATA AVAILABILITY AND NOTES.

The data series used by The Conference Board to compute the three composite indexes and reported in the tables in this release are those available “as of” 12 Noon on January 19, 2005. Some series are estimated as noted below.

* Series in the leading index that are based on The Conference Board estimates are manufacturers’ new orders for consumer goods and materials, manufacturers’ new orders for nondefense capital goods, and the personal consumption expenditure deflator for money supply. Series in the coincident index that are based on The Conference Board estimates are personal income less transfer payments and manufacturing and trade sales. Series in the lagging index that are based on The Conference Board estimates are inventories to sales ratio, consumer installment credit to income ratio, change in labor cost per unit of output, and the personal consumption expenditure deflator for commercial and industrial loans outstanding.

The procedure used to estimate the current month’s personal consumption expenditure deflator (used in the calculation of real money supply and commercial and industrial loans outstanding) now incorporates the current month’s consumer price index when it is available before the release of the U.S. Leading Economic Indicators.

Effective with the September 18, 2003 release, the method for calculating manufacturers’ new orders for consumer goods and materials (A0M008) and manufacturers’ new orders for nondefense capital goods (A0M027) has been revised. Both series are now constructed by deflating nominal aggregate new orders data instead of aggregating deflated industry level new orders data. Both the new and the old methods utilize appropriate producer price indices. This simplification remedies several issues raised by the recent conversion of industry data to the North American Classification System (NAICS), as well as several other issues, e.g. the treatment of semiconductor orders. While this simplification caused a slight shift in the levels of both new orders series, the growth rates were essentially the same. As a result, this simplification had no significant effect on the leading index.

Effective with the January 22, 2004 release a programming error in the calculation of the leading index — in place since January 2002 — has been corrected. The cyclical behavior of the leading index was not affected by either the calculation error or its correction, but the level of the index in the 1959-1996 period is slightly higher.

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Professional Contacts at The Conference Board:
Ken Goldstein: 212-339-0331
Indicators Program: 212-339-0336

Media Contacts:
Randy Poe: 212-339-0234
Frank Tortorici: 212-339-0231

Email:
indicators@conference-board.org

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THE CYCLICAL INDICATOR APPROACH. The composite indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging indexes are essentially composite averages of between four and ten individual leading, coincident, or lagging indicators. (See page 3 for details.) They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component—primarily because they smooth out some of the volatility of individual components.

Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, while the cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity. The cyclical turning points in the lagging index generally have occurred after those in aggregate economic activity.

U.S. Composite Indexes: Components and Standardization Factors

Leading Index
Factor

1

Average weekly hours, manufacturing

0.1965

2

Average weekly initial claims for unemployment insurance

0.0252

3

Manufacturers’ new orders, consumer goods and materials

0.0588

4

Vendor performance, slower deliveries diffusion index

0.0292

5

Manufacturers’ new orders, nondefense capital goods

0.0146

6

Building permits, new private housing units

0.0202

7

Stock prices, 500 common stocks

0.0291

8

Money supply, M2

0.2774

9

Interest rate spread, 10-year Treasury bonds less federal funds

0.3303

10

Index of consumer expectations

0.0188

Coincident Index

1

Employees on nonagricultural payrolls

0.5235

2

Personal income less transfer payments

0.2141

3

Industrial production

0.1467

4

Manufacturing and trade sales

0.1157

Lagging Index

1

Average duration of unemployment

0.0378

2

Inventories to sales ratio, manufacturing and trade

0.1249

3

Labor cost per unit of output, manufacturing

0.0648

4

Average prime rate

0.2788

5

Commercial and industrial loans

0.0968

6

Consumer installment credit to personal income ratio

0.2019

7

Consumer price index for services

0.1950

The component factors are inversely related to the standard deviation of the month-to-month changes in each component. They are used to equalize the volatility of the contribution from each component and are “normalized” to sum to 1. When one or more components are missing, the other factors are adjusted proportionately to ensure that the total continues to sum to 1.

These factors were revised effective on the release for January 2004, and all historical values for the three composite indexes were revised at this time to reflect the changes. (Under normal circumstances, updates to the leading, coincident, and lagging indexes only incorporate revisions to data over the past six months.) The factors for the leading index were calculated using 1984-2002 as the sample period for measuring volatility. A separate set of factors for the 1959-1983 period is available upon request. The primary sample period for the coincident and lagging indexes was 1959-2002. For additional information on the standardization factors and the index methodology see: “Benchmark Revisions in the Composite Indexes,” Business Cycle Indicators
December 1997 and “Technical Appendix: Calculating the Composite Indexes” Business Cycle Indicators
December 1996, or the Web site: www.globalindicators.org.

To address the problem of lags in available data, those leading, coincident and lagging indicators that are not available at the time of publication are estimated using statistical imputation. An autoregressive model is used to estimate each unavailable component. The resulting indexes are therefore constructed using real and estimated data, and will be revised as the unavailable data during the time of publication become available. Such revisions are part of the monthly data revisions, now a regular part of the U.S. Business Cycle Indicators program. The main advantage of this procedure is to utilize in the leading index data such as stock prices, interest rate spread, and manufacturing hours that are available sooner than other data on real aspects of the economy such as manufacturers’ new orders. Empirical research by The Conference Board suggests that there are real gains in adopting this procedure to make all the indicator series as up-to-date as possible.

U.S. Leading Economic Indicators news release schedule for 2005:
February 17, Thursday………………………..for January 2005 data
March 17, Thursday…………………………..for February 2005 data
April 21, Thursday…………………………….for March 2005 data
May 19, Thursday……………………………..for April 2005 data
June 20, Monday………………………………for May 2005 data
July 21, Thursday………………………………for June 2005 data
August 18, Thursday…………………………..for July 2005 data
September 22, Thursday……………………….for August 2005 data
October 20, Thursday………………………….for September 2005 data
November 21, Monday…………………………for October 2005 data
December 22, Thursday………………………..for November 2005 data

All releases are at 10:00AM ET.

ABOUT THE CONFERENCE BOARD. The Conference Board is the premier business membership and research network founded in 1916. It has become a global leader in helping executives build strong professional relationships, expand their business knowledge and find solutions to a wide range of business challenges. Its Economics Program, under the direction of Chief Economist Gail Fosler, is a recognized source of forecasts, analysis and objective indicators such as Leading Economic Indicators and Consumer Confidence.

This role is part of a long tradition of research and education that stretches back to the compilation of the first continuous measure of the cost of living in the United States in 1919. In 1995, The Conference Board assumed responsibility for computing the composite indexes from the U.S. Department of Commerce. The Conference Board now produces business cycle indexes for the U.S., Australia, France, Germany, Korea, Japan, Mexico, Spain and the U.K. To subscribe to any of these indexes, please visit www.globalindicators.org or contact the customer service department at 212-339-0345 or email indicators@conference-board.org.

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